Introduction
Value Chain Analysis describes the
activities that take place in a business and relates them to an analysis of the
competitive strength of the business.
Influential work by Michael Porter
suggested that the activities of a business could be grouped under two
headings:
(1) Primary Activities -
those that are directly concerned with creating and delivering a product (e.g.
component assembly); and
(2) Support Activities, which
whilst they are not directly involved in production, may increase effectiveness
or efficiency (e.g. human resource management). It is rare for a business to
undertake all primary and support activities.
Value Chain Analysis is one way of
identifying which activities are best undertaken by a business and which are
best provided by others ("out sourced").
Linking Value Chain Analysis to
Competitive Advantage
What activities a business
undertakes is directly linked to achieving competitive advantage. For example,
a business which wishes to outperform its competitors through differentiating
itself through higher quality will have to perform its value chain activities
better than the opposition.
By contrast, a strategy based on seeking cost
leadership will require a reduction in the costs associated with the value
chain activities, or a reduction in the total amount of resources used.
Primary Activities
Primary value chain activities
include:
Primary Activity
|
Description
|
Inbound logistics
|
All those activities concerned
with receiving and storing externally sourced materials
|
Operations
|
The manufacture of products and
services - the way in which resource inputs (e.g. materials) are
converted to outputs (e.g. products)
|
Outbound logistics
|
All those activities associated
with getting finished goods and services to buyers
|
Marketing and sales
|
Essentially an information
activity - informing buyers and consumers about products and services
(benefits, use, price etc.)
|
Service
|
All those activities associated
with maintaining product performance after the product has been sold
|
Support Activities
Support activities include:
Secondary Activity
|
Description
|
Procurement
|
This concerns how resources are
acquired for a business (e.g. sourcing and negotiating with materials
suppliers)
|
Human Resource Management
|
Those activities concerned with recruiting,
developing, motivating and rewarding the workforce of a business
|
Technology Development
|
Activities concerned with managing
information processing and the development and protection of
"knowledge" in a business
|
Infrastructure
|
Concerned with a wide range of
support systems and functions such as finance, planning, quality control and
general senior management
|
Steps in Value Chain Analysis
Value chain analysis can be broken
down into a three sequential steps:
(1) Break down a market/organisation
into its key activities under each of the major headings in the model;
(2) Assess the potential for adding
value via cost advantage or differentiation, or identify current activities
where a business appears to be at a competitive disadvantage;
(3) Determine strategies built
around focusing on activities where competitive advantage can be sustained
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